A machine costing $257,500 with a four-year life and an estimated $20,000 salvag
ID: 2335352 • Letter: A
Question
A machine costing $257,500 with a four-year life and an estimated $20,000 salvage value is installed in Luther Company's factory on January 1. The factory manager estimates the machine will produce 475,000 units of product during its life. It actually produces the following units: 220,000 in 1st year, 124,600 in 2nd year, 121,800 in 3rd year, 15,200 in 4th year. The total number of units produced by the end of year 4 exceeds the original estimate-this difference was not predicted. (The machine must not be depreciated below its estimated salvage value.) Required: Compute depreciation for each year (and total depreciation of all years combined) for the machine under each depreciation method. Round your per unit depreciation to 2 decimal places.)Explanation / Answer
Straight line Method
A
Cost
$ 257,500.00
B
Residual Value
$ 20,000.00
C=A - B
Depreciable base
$ 237,500.00
D
Life [in years]
4
E=C/D
Annual SLM depreciation
$ 59,375.00
Straight line Method
Year
Book Value
Depreciation expense
Ending Book Value
Accumulated Depreciation
1
$ 257,500.00
$ 59,375.00
$ 198,125.00
$ 59,375.00
2
$ 198,125.00
$ 59,375.00
$ 138,750.00
$ 118,750.00
3
$ 138,750.00
$ 59,375.00
$ 79,375.00
$ 178,125.00
4
$ 79,375.00
$ 59,375.00
$ 20,000.00
$ 237,500.00
Units of Production method
A
Cost
$ 257,500.00
B
Residual Value
$ 20,000.00
C=A - B
Depreciable base
$ 237,500.00
D
Usage in units produced
475000
E
Depreciation per Unit produced
0.50
Year
Book Value
Usage
Depreciation expense
Ending Book Value
Accumulated Depreciation
1
$ 257,500.00
220000
$ 110,000.00
$ 147,500.00
$ 110,000.00
2
$ 147,500.00
124600
$ 62,300.00
$ 85,200.00
$ 172,300.00
3
$ 85,200.00
121800
$ 60,900.00
$ 24,300.00
$ 233,200.00
4
$ 24,300.00
15200
$ 4,300.00*
$ 20,000.00
$ 237,500.00
*Depreciation for last year is not as per units produced. It is an amount which equals salvage value to $20000 at the end of year 4.
Double declining Method
A
Cost
$ 257,500.00
B
Residual Value
$ 20,000.00
C=A - B
Depreciable base
$ 237,500.00
D
Life [in years]
4
E=C/D
Annual SLM depreciation
$ 59,375.00
F=E/C
SLM Rate
25.00%
G=F x 2
DDB Rate
50.00%
.
Year
Beginning Book Value
Depreciation rate
Depreciation expense
Ending Book Value
Accumulated Depreciation
1
$ 257,500.00
50.00%
$ 128,750.00
$ 128,750.00
$ 128,750.00
2
$ 128,750.00
50.00%
$ 64,375.00
$ 64,375.00
$ 193,125.00
3
$ 64,375.00
50.00%
$ 32,187.50
$ 32,187.50
$ 225,312.50
4
$ 32,187.50
50.00%
$ 12,187.50**
$ 20,000.00
$ 237,500.00
** In year 4 Depreciation will be an amount which makes book value to be equal to Residual value.
Straight line Method
A
Cost
$ 257,500.00
B
Residual Value
$ 20,000.00
C=A - B
Depreciable base
$ 237,500.00
D
Life [in years]
4
E=C/D
Annual SLM depreciation
$ 59,375.00
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